European ABS: selective opportunities emerge after Brexit

24/08/2016

Europe’s asset-backed securities (ABS) market has proved resilient since the initial negative impact of the Brexit vote, with pricing returning to relative stability during July. However, the early turbulence created some selective investment opportunities for long-term institutional investors while also enabling profit-taking in areas where spreads (over Libor) have recovered. 

Why has there not been more Brexit-related volatility? European ABS and UK paper, in particular, have been less volatile than might have been expected. In our view, a certain amount of Brexit risk had been priced in prior to the vote, but the significant market sell-off in the first quarter also had the important effect of catalysing a significant transfer of UK risk exposure to relatively stable long-term asset management accounts from short-term leveraged (“fast money”) strategies. As a result, there has been little selling of UK paper since the referendum – rather, a number of accounts have looked to initiate or increase exposure to the market at the spreads seen post-vote.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.

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